Question

A large wine maker would like to buy new stainless steel containers for aging its wine. It is planning to purchase a number of containers for a total of $450,000. They have 9 years of usable life and lose the same value each year. The wine maker will then sell them in 3 years for an estimated $200,000 to replace with brand new ones at that time. The wine maker falls into a 40% tax rate bracket. Calculate the after-tax salvage value at the time the containers will get sold.

Answer 1

Answer:

After-tax salvage value = $240,000

Explanation:

This can be calculated as follows:

Tax rate = 40%

Purchase price = $450,000

Annual depreciation expense = Purchase price / Number of usable life = $450,000 / 9 = $50,000

Accumulated depreciation after year 3 = Annual depreciation expense * 3 = $50,000 * 3 = $150,000

Remaining book value in 3 years = Purchase price - Accumulated depreciation after year 3 = $450,000 - $150,000 = $300,000

Salvage value in 3 years = Estimated sales price in 3 years = $200,000

Since the Net book value in 3 years of $300,000 is greater than the Salvage value in 3 years of $200,000, that means there is a tax saving. Therefore, the the after-tax salvage value at the time the containers will get sold can be calculated using the following formula:

After-tax salvage value = Salvage value + (Tax rate * (Remaining book value - Salvage value)) = $200,000 + (40% * ($300,000 - $200,000)) = $240,000